Kotak retains 'reduce' on RIL on medium-term growth concern

Moneycontrol Bureau

Reliance Industries (RIL) has lined up ambitious capex for its various businesses, but that has failed to lift investor sentiment. In one such instance, Kotak Securities has retained 'reduce' rating on RIL stock with a target price of Rs 855 on assumptions of a subdued business environment, especially in the company’s refining and non core businesses.

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Here are five reasons for Kotak to retain cautious stance on RIL

The brokerage expects refining margins to remain muted in the medium term given a significant increase in global refining capacity. Also increase in supply from OPEC nations is likely to offset incremental oil demand.

Retailing with 9 million sq. ft of organised retailing at the end of FY2013, RIL is far behind its original targets of 25 mn sq. ft.

The firm has already pumped in Rs 74 billion in its telecom arm and with around Rs 110 billion of debt the subsidiary has already guzzled up Rs 185 billion and there is low visibility business economics that can justify  RIL's aggressive plan for the sector in near term.

Even in shale gas division, the firm has reported an EBITDA of USD 483 million in FY13 which is quite low compared to the cumulative investment of around USD 5.7 billion. RIL shale gas and related hydrocarbon volumes have shown robust growth and this will likely continue for the next few years. However, large invested capital along with additional capex requirements for drilling incremental wells may prelude meaningful value creation unless gas prices sustain at higher levels.

Refining margins are expected to slide to USD 8.7/bbl this year as against USD 9.2/bbl, given a significant increase in supply which will offset the incremental oil demand in